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Zimmer Posts Poor Americas Sales, Upbeat on Biomet Takeover

On Aug 8, 2014, we issued an updated research report on Zimmer Holdings, Inc. – a major player in the musculoskeletal industry. While Zimmer reported a mixed fiscal second quarter with a bottom-line beat and a top-line miss, we are optimistic about the impending $13.35 billion acquisition of Biomet, successful completion of which will help the company better capture the global $45 billion musculoskeletal industry.

Zimmer’s second-quarter 2014 adjusted earnings per share of $1.49 edged past the Zacks Consensus Estimate by a penny and were up 4.2% year over year. Revenues grossed $1.16 billion, up 0.9% at CER, but missed the $1.20 billion mark. The year-over-year growth came on the back of a more favorable mix of products with decent sales growth in all geographies (barring Americas).

Despite challenging market conditions in the form of pricing pressure (the company’s top-line growth in the reported quarter was partially offset by continued pricing pressure, mostly in the Americas and Europe operating segments), the reported quarter witnessed gradual stability in the global musculoskeletal market with better-than-expected sales growth in certain geographies banking on improved procedural volume. While musculoskeletal markets were healthy in the Asia Pacific (sales grew by 6.9% at constant exchange rate or CER) and Europe (up 4.9%), the same proved disappointing in the Americas (down 2.7%).

We are impressed with the strong strategic and financial goals which the combined entity expects to reach after the closure of the Biomet deal. Together the combined company will be more competitive in knee and hip franchises with a diverse revenue base to increase scale in the faster growing markets in adjacent categories.

However, pressure on margin continues. In addition, intense competition in the orthopedic market and currency headwind continue to pose major threats. The stock currently carries a Zacks Rank #4 (Sell).

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